What ever happened to an equity risk premium?

Market participants will know that stocks are inherently more risky than government bonds. Historically investors demanded that stocks pay a higher dividend yield over risk-free government bonds to compensate for the risk. However, you will notice that over the last twenty years dividends payed by companies have declined dramatically. Right now there is no equity risk premium in the markets compared to the 10 year Treasury. Estimates put the 2010 dividend yield for the S&P 500 between 1.7-2.0%which is pretty pathetic considering the 10 year note is yielding 3.83%. The average S&P 500 dividend yield since 1935 is 3.8%.

I guess the argument is that there is no need for an equity risk premium because stocks will provide significant capital gains compared to bonds. I doubt it considering we are in a secular bear market.

Here is a chart which shows the dividend yield of the S&P 500 since 1870(courtesy Robert Shiller). You will see that we are near all time lows. Is it really a great time to be committing capital to stocks?

chart data from Robert Shiller

Black Swan Insights


1 comment: